Get the low down on low down payments
You may have heard the rule of thumb that you shouldn't buy a home unless you can put down 20 percent of the purchase price. However, today’s home buyers have many choices when it comes to the size of the down payment.
While this magic number of 20 percent will save you from paying Private Mortgage Insurance (PMI), an added insurance policy that protects the lender if you are unable to pay your mortgage, you can pay considerably less than this if you want.
“Today's consumers persistently overestimate the size of a down payment they need to finance a home,” says Christina Boyle, SVP and Head of Single-Family Sales & Relationship Management at Freddie Mac.
According to the results of a recent survey conducted by Zelman & Associates, 39 percent of those surveyed estimated that the minimum down payment requirement for a home is at least 15 percent of the purchase price. The reality is quite different however, as qualified buyers can get a conventional mortgage with a down payment of as little as three percent.
In fact, recent statistics show more than one in five borrowers who took out conventional mortgages in 2014 put down 10 percent or less.
Educating potential homeowners on the rules of down payments — and available assistance programs — plays a large role in getting qualified borrowers off the sidelines and into homeownership, according to Boyle, who also notes that today's historically low mortgage rates, coupled with affordable home prices in many parts of the country, make it an attractive time to consider buying.
“If putting 20 percent down will deplete all of your savings and leave you with no financial cushion, it's probably not in your best interest,” she says.
If you don’t put down 20 percent, the cost of PMI varies based on your loan-tovalue ratio — the amount you owe on your mortgage compared to its value — and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed. While it’s no doubt an added cost, it enables buyers to purchase now and begin building equity versus waiting five to 10 years to build enough savings for a larger down payment.
Additionally, once you've built equity of 20 percent in your home, you can cancel your PMI and remove that added expense from your monthly payment.
New homeownership opportunities are poised to grow. Carefully evaluate your finances to determine how much you can afford and talk with your lender or housing professional about what makes best sense for you and your particular situation.